Ready for a break higher – ING

Markets see the uptick in EUR/USD into the upper half of the 1.09-1.10 range as the start of a longer-lasting upward trend. The target is a move to 1.12 in the near term on the back of a tighter rate spread and stabilising risk sentiment, ING’s FX strategist Francesco Pesole notes.

A break higher is imminent

“Today’s US CPI could prompt EUR/USD to make a decisive break above 1.100. Last week, the pair printed very briefly above 1.10 before rapidly dropping back to 1.0950. That might have been due to markets being reluctant to short the dollar aggressively before the July PPI and CPI reports. We expect the CPI hurdle to be cleared without losses today.”  

Interestingly, the Euro wasn’t held back by the dismal ZEW survey for Germany on Tuesday, another signal that soft eurozone activity is probably priced in. Incidentally, sticky inflation in the eurozone does not really allow markets to price in more than 75bp of cuts by the European Central Bank by year-end. Arguably, even 75bp looks too dovish given the latest data.

In the rest of Europe, Sweden released inflation figures for July this morning. Core CPIF inflation slowed from 2.3% to 2.2% YoY versus expectations for 2.1%, but that shouldn’t prevent the Riksbank from cutting rates by another 25bp next week. Our call for the remainder of the year is 75bp of easing including next week’s cut, but risks are unarguably skewed to 100bp, which is what the market is pricing in.